A fiscal safety net
What to do when you are trying to save agovernment from itself? At the extreme, technocrats can seize the levers of government, as happened in Italy in late 2011 when, facing the threat of default, the country turned to a cabinet led by economist Mario Monti to take charge of economic reform and reassure jittery investors.
But it is not just in heavily indebted eurozone countries where the economic management of elected governments is being called into question. In Australia, successive governments appear increasingly incapable of restoring public finances to health. On current estimates, cumulative budget deficit for the period 2013–17 will reach $140billion, up from pre-election estimates of around $58 billion.
Collectively, politicians have behaved like startled rabbits in the face of plunging revenues, alternately unwilling or incapable of implementing the spending cuts and tax reforms needed to putthe budget on a sustainable path to surplus.
One attempt to make governments more accountable for the consequences of their fiscal policy choices has been to establish the Parliamentary Budget Office (see breakout below). But economist Nicholas Gruen thinks there needs to be more potent medicine to ensure fiscal policy is no longer held hostage to political fortune.
Gruen has proposed that there be an independent statutory body, the Central Fiscal Authority (CFA), to manage fiscal policy by manipulating taxation rates. The authority would set effective tax rates by changing the parameter applying to rates for company, income and sales taxes enshrined in legislation, essentially distancing government from day-to-day control over the flow of revenue.
He argues that such an arrangement would not only mean fiscal policy was insulated from short-term political pressures,but it could be adjusted more closely, rapidly and credibly to changes in economic circumstances, taking some of the load off monetary policy and boosting investor confidence. The economist said it could curb the sort of ruinous tax cut auctions that have been a feature of recent elections.
“An independent body setting the stance offiscal policy would make it harder for politicians to promise a tax cut without explaining how it will be funded,” says Gruen. “The existence of the CFA would shift the focus of attention to the capacity of a party’s policies to deliver economic circumstances capable of allowing the desired tax cut.”
The devil you know
But even if it is technically feasible to put an independent body in charge of fiscal policy, is it necessarily desirable? There is unease about the idea of letting an unelected body manipulate tax rates.
According to public administration expert Professor John Wanna, the Sir John Bunting chair of public administration atthe Australia and New Zealand School of Government, “most Australians would say that they did not elect a government to set up a body to shift the GST to 12 per cent”.
Professor Wanna says public approval of independent bodies is conditional on whether or not they like their decisions –something the RBA is only too well aware of whenever it changes interest rates.
And governments themselves are reluctant to cede power to those over which they exert little control, he says, noting the lengths they go to, to make sure even the commissions of inquiry they appoint deliver the findings they want.
“When a government calls an independent review, they shape its findings by setting tight terms of reference or being very careful about who they put on it, or they keep its findings under wraps,”says Professor Wanna.
While the idea of using independent bodies and advisers to improve the quality of government decision-making is attractive, even proponents such as Gruen think there are limits.
He points to the “fairly extreme” technocratic approach taken in Europe, where external bodies like the European Commission and the International Monetary Fund have dictated fiscal policy to heavily indebted governments like those in Greece and Spain. This, he says,“does not work”.
There is no doubting the power and influence of independent statutory organisations like the RBA and the Productivity Commission. And, if Banks and Carmichael are right, the system of open inquiries and public reports that forms the basis for Australia’s transparency arrangements has led to governments making better-informed and more beneficial decisions.
But fears that technocrats are in danger of supplanting democratically elected politicians appear overstated.Governments can, and do, ignore the recommendations of advisers like the Productivity Commission, and the RBA board that sets monetary policy is composed of government appointees and includes its top economic adviser, theTreasury secretary.
Governments, as ever, are able to make poor decisions all on their own.
The End
